Budget 2024 - Capital Gains and Stock Options

April 2024

On April 16, 2024, the federal government tabled its 2024 budget with an overarching theme of providing “fairness for every generation”.  This brief note focuses on capital gains and stock option taxation.

Capital Gains

Budget 2024 proposes to increase the capital gains inclusion rate from one half to two thirds for corporations and trusts, and from one half to two thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.

For individuals, the tax inclusion for annual taxable gains above $250,000 increases from 50% to 66.67%.  For annual gains for up to $250,000, the capital gains rate remains 50% of the marginal income tax rate. In effect, the current capital gains tax rate is in the order of 24% to 27% (depending on the province), which the Budget proposes to increase to 32% to 36% for gains above $250,000. For many employees, this is not a meaningful change given the taxes on gains below $250,000 per year remains the same, and even those gains above $250,000 have only an 8-9 percentage point increase.

It is important to note that while individual investors receive the first $250,000 at preferred rates, corporations and trusts do not have this favourable benefit. This difference creates one more consideration for executives in assessing the relative benefits and costs of holding company shares through a corporation or trust versus holding shares as part of an individual portfolio. 

Since the change does not come into effect until June 25 and the $250,000 available for 2024 is not pro-rated, this window between Budget announcement and implementation of the new capital gains tax rates will allow for some financial planning for individuals or companies with very large unrealized capital gains (and for the government to generate revenue in the realization of some unrealized capital gains).

Stock Option Taxation

The changes in stock option taxation largely mirror those of the capital gains taxes described above. But the overall impact cannot be fully understood without a flashback explanation of the 2021 stock option tax changes [please note Hugessen’s article for information on Proposed Changes to Stock Options]. 

Flash back to 2021 stock option tax changes.

As of July 2021, changes were made to stock option taxes in a manner whereby stock options were designated as either “Qualified” or “Unqualified”:

  • Gains on “Unqualified” stock options became fully taxable (no preferred tax treatment).
  • “Qualified” stock options kept the preferred 50% inclusion rate aligned to that of capital gains tax at the time.
  • For Non-CCPC (Canadian Controlled Private Corporations) with annual gross revenues of $500 million or more, only the first $200,000 of value under the option can be considered as “qualified”.

The company determines which options to designate as “qualified” within the vesting allocation rules set out, with all others being “unqualified”. The current option taxation regime has a fair bit of administrative complexity.

The 2024 Budget Stock Option Rules

The proposed capital gains changes are not expected to impact “unqualified” stock options given that they are already fully taxed (i.e., no deduction available).  The new rules will change the taxation of “qualified” stock options.  Effectively, for “qualified” stock options the new rules mirror that of the capital gain rules, whereby:

  • Up to $250,000 annual stock option gain will have treatment unchanged.  That is, one-half deduction of taxable benefit to equate option gains to capital gains.  We note that the $250,000 individual amount is a combined capital gains limit (i.e., is inclusive of stock option gains).
  • Amounts above $250,000 annual stock option gains will have a higher tax rate matching the new rules for capital gains.  One-third of the gain (instead of half) can be deducted from taxable income.  This increases the effective tax on option gains to match the capital gain tax rates described above (i.e., 32% to 36% depend on which province the option holder resides in). 

Implications for Employees and Employers

During the window between announcement of the 2024 Budget and June 25, 2024, employees may be considering locking-in some capital gains and even stock option gains. Companies have both written and unwritten rules for employees, senior executives and Board members selling shares and/or exercising stock options. 

Note: it is our understanding that shares can be sold for a gain and immediately repurchased.  Perhaps this is an alternative that could be considered.

Looking past any transition issues leading up to June 25, the relatively small increase in stock option tax rates (above a healthy annual $250,000 gain) will likely not by itself tip the scales further away from company stock option usage for companies.

  • The vast majority of large company stock options are fully taxed as non-qualified stock options.  
  • Where qualified stock options exist, the combination of a $250,000 being annually available for preferred rates and the relatively small increase in capital gains inclusion rate suggests the change may not be material for most participants.

From an administration point of view, the overlay of these new rules on top of the 2021 changes create a number of challenges and potential issues:

  • Companies are required to track which options are qualified and non-qualified and withhold appropriate taxes; yet individual specific situations may now determine the taxes owed and presumably the taxes to be withheld.
  • Both rules and expectations with respect to stock option exercises and share ownership transactions should be evaluated in consideration of potential participant tax planning.

As a final note, we would be remiss if we don’t reflect on the year the 2000 Paul Martin budget decreased the capital gains inclusion from 75% to 50%.  The current budget proposes an increase from 50% to 67%.  One wonders whether the powder is kept dry for one more adjustment.